TaxTMI 
TaxTMI 
2024 (4) TMI 1345
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..... Nos. 18875 of 2021 and 29886 of 2023 : Dr. M.R. Venkatesh For the Petitioner(s) in W.P.Nos.19162, 19177, 19360 & 19367 of 2020 : Ms. Ramya Subramaniam For the Petitioner(s) in W.P.No.19438 of 2020 : Mr. T.D. Selvan Babu For the Petitioner(s) in W.P.Nos.19460, 19463, 19761 & 19764 of 2020 : Mr. T.K. Bhaskar, Mr. Pranav. G, Ms.Pranaya Dayalu & Mr. P. Arvind For the Petitioner(s) in W.P.No.19930 of 2020 : Mr. C.V. Shailandran For the Petitioner(s) in W.P.No.638 of 2021 : Mr. Jayesh B. Dolia Senior Counsel for M/s. Aiyar and Dolia For the Petitioner(s) in W.P.Nos.776, 1314 & 1332 of 2021 : Ms. Narmada Sampath For the Petitioner(s) in W.P.No.1310 of 2021 : Mr. B. Dhanaraj For the Petitioner(s) in W.P.Nos.1379, 1387 & 2573 of 2021 : Mr. K. Ramanraj For the Petitioner(s) in W.P.No.1391 of 2021 : Mr. J.R.K. Bhavanantham For the Petitioner(s) in W.P.Nos.7388, 7391, 18999, 19003 & 19006 of 2021 : M/s. Swaminathan Law Associates For the Petitioner(s) in W.P. Nos. 9501 & 9940 of 2022 : Mr. Ilaya Perumal Party-in-Person in W.P.No.9801 of 2022 : Mr. K. Prabhakaran Party-in-Person in W.P. No. 14557 of 2022 : Mr. Sudhir Kathpalia For the Petitioner(s) in W.P.No.1....
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....6 in W.P.No.17958 of 2020 : Mr. R. Palaniandavan For the Respondent 6 in W.P.No.1310 of 2021 For the Respondent 7 in W.P.No.18154 of 2022 For the Respondent 8 in W.P.Nos.18156 of 2022, 18323 & 847 of 2023 For the Respondent 7 in W.P.Nos.847 & 18323 of 2023 For the Respondent 6 in W.P.No.24502 of 2022 For the Respondent SEBI : Mr. V. Shivkumar for M/s. Shivakumar & Suresh COMMON ORDER THE CHIEF JUSTICE The petitioners herein are mainly the shareholders and the bondholders of Lakshmi Vilas Bank [for brevity, "LVB"]. They assail the action of the Reserve Bank of India [in short, "RBI"] purportedly under Section 45 of the Banking Regulation Act, 1949 [hereinafter, "the Act of 1949"] amalgamating LVB with the DBS Bank India Limited [for brevity, "DBIL"]. They also assail the writing off the Tier II bonds and also the shares. 2. LVB is a scheduled commercial bank and a company registered under the Companies Act, 2003. The RBI, on or about 17.11.2020, published a draft scheme inviting objections for amalgamation of LVB with DBIL. On the said date, RBI declared moratorium for LVB, thereby restricting the withdrawal of the amount to Rs. 25,000/- (Rupees Twenty ....
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....atute upon a public body such as RBI has to be exercised in a transparent manner and it is not up to the RBI to exercise its power in an opaque manner by making discreet enquiries. (iv) No documents were shown either in a sealed cover or otherwise and the only documentary record was an internal noting, which also has not been produced. Moreover, as per the dictum in Delhi Development Authority vs. Hello Home Education Society [2024 INSC 33], internal notings have been held to not confer any right on any party. (v) The RBI's argument that they had discreetly made enquiries with a few private sector banks/wholly owned subsidiaries of foreign banks during December 2019, January 2020 and further between September - October 2020 is illegal and improper, as Section 45 of the Act of 1949, as it stood prior to the amendment on 26.06.2020 and even post amendment, does not empower RBI to formulate a scheme outside the moratorium period in a case where moratorium has been imposed. The amendment to Section 45 of the Act of 1949 only sought to create an alternate route, whereby, amalgamation can be effected without imposing moratorium. In cases where moratorium has been im....
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....ds all stakeholders, including the RBI. 4. The substratum of the arguments of the learned Senior Advocates and learned Advocates for the shareholders is as under: (i) Writing off the shareholdings is illegal. The same is in direct contravention to Article 300A of the Constitution of India, which stipulates that "no person shall be deprived of his property save by authority of law". Section 45(5)(f) and (h) of the Act of 1949 only permits reduction and does not permit any fully writing off the shareholdings. The said Section further requires that even in the event of a reduction, compensation or swap value has to be provided. The Apex Court, in the cases of Jilubhai Nanbhai Khachar vs. State of Gujarat [1995 Supp (1) SCC 596], Hindustan Petroleum Corporation Ltd. Vs. Darius Shapur Chennai [(2005) 7 SCC 627], State of West Bengal vs. Vishnunarayana & Associates (P) Ltd. [(2002) 4 SCC 134], S.R. Ejaz vs. T.N. Handloom Weaving Cooperative Societies Limited [(2002) 3 SCC 137] and K.T. Plantations Pvt. Ltd. VS. State of Karnataka [(2011) 9 SCC 1] reiterated and protected the interests and rights of the property owners, i.e., the shareholders in this case. (ii) The re....
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....mpanies Act, 2013, which deals with amalgamation of companies in the public interest. Where an amalgamation is carried out by the sanction of the Union of India, there is a requirement to place the members/shareholders of the earlier entity on the same footing in the amalgamated entity and the shareholders shall be compensated. Furthermore, Section 45(5)(h) of the Act of 1949 provides for compensation or allotment of shares. (vi) In the event of acquisition of a bank by the Central Government, the shareholders ought to be paid compensation in accordance with the Fifth Schedule of the Act of 1949. In the said Schedule, it has been provided that the market value of any share or bond may be valued on the basis of its average market value over a reasonable period of time. (vii) In the event that the shareholders were issued fresh shares in the amalgamated entity in lieu of their shares in LVB, there would only be a dilution of the share capital post amalgamation which would have no effect on the liquidity position of the amalgamated entity. The shareholders would have continued to enjoy equity ownership in the amalgamated entity, though the same would have been determ....
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....e mentioned in the scheme, is arbitrary. The scheme has a statutory flavour. It binds all the stakeholders including the RBI. When the scheme specifically mandates that the bondholders would be paid the value of the bonds by the transferee bank as per Section 45(9) of the Act of 1949, it is beyond the power of RBI to override the scheme and rely upon the term of the bond. RBI has virtually modified the sanctioned scheme, which power is not vested in it. (vi) Some relevant facts have been eschewed from consideration and not procedurally followed, coupled with the fact that the administrative action has no nexus with the fact on record. Thus, the instant case has to undergo the process of judicial review. Reliance is placed on the judgment of the Apex Court in the case of Ganesh Bank of Kurundwad Ltd. vs. Union of India [(2006) 10 SCC 645] to buttress the said aspect. The Apex Court, in the case of Union of India & Ors. vs Hindustan Development Corporation & Ors. [AIR 1994 SC 988] held that a decision of an authority shall be subject to judicial review, where such a decision affects the rights of a party which it had in the past, been permitted to enjoy by the decision-maker....
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....cessary by the RBI and such write off must be contained in the provisions of the scheme itself. (x) The judgment of the Bombay High Court in the case of Axis Trustee Services Limited vs Union of India & Ors. [2023 SCC OnLine Bom 180], specifically held that the bonds shall not be automatically written off but, require a specific act of violation. (xi) The bonds can be written off only upon the occurrence of a PONV Trigger event as defined under Clause 11 or Clause 17(d) of the Terms of Offer. The impugned letter only invokes Clause 17(d) of the Terms of Offer. The PONV Trigger event came into force when the RBI published the draft scheme on 17.11.2020. The said deemed PONV Trigger event ceased to be in force when the final scheme was notified on 25.11.2020. Section 45(7) of the Act of 1949 contemplates two separate events, viz., (i) the sanctioning of the scheme; and (ii) the said scheme coming into force. Therefore, with the sanctioning of the scheme on 25.11.2020, the requirements under Section 45(4) of the Act of 1949 were met and thus, the deemed PONV Trigger event under Clause 17(d) ceased to be in force. Any writing off the bonds, on account of the scheme, c....
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...., by its letters dated June 25, 2018, October 03, 2018, December 07, 2019, March 7, 2019 and September 16, 2019 impressed upon LVB to augment its capital. As the bank failed to raise requisite capital and its financials continued to decline, LVB was placed under the PCA framework by RBI on September 27, 2019. As LVB failed to draw-up a credible revival plan and in view of the negative networth of Rs. (-)699 crores as on September 30, 2020 and continuous depletion of liquidity, RBI was constrained to take steps under Section 45 of the Act of 1949 to protect the interest of more than 20 lakh public depositors/account holders with around Rs. 20,000 crores in deposits. (vi) The proposal submitted by M/s. India Bulls for voluntary amalgamation with LVB was rejected by RBI on October 9, 2019. Based on the adverse inputs received from regulatory/enforcement agencies against the conduct of M/s. India Bulls, impinging on the "fit and proper" status of the prospective investors, it was decided by RBI to reject the amalgamation proposal. (vii) On June 15, 2020, LVB executed a Letter of Intent for amalgamation with M/s. Clix Group entities and it was stated that due diligence....
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.... bank, protect depositors' interest and above all safeguard stability of banking and financial sector while exercising powers under Section 45 of the Act of 1949 by RBI and the Central Government. (x) The judgment of the Apex Court in the case of Davis Kuriape vs. Union of India [2001 SCC OnLine Ker 517] is relied upon, where it is held that the power of judicial review, in respect of a scheme under Section 45 of the Act of 1949, is very narrow. When the RBI, in its wisdom, has thought fit to include a provision in a scheme, the High Court in writ jurisdiction cannot sit in appeal over such decision and can interfere only in cases of extreme arbitrariness or unreasonableness. The judgment of the Apex Court in the case of Vishal Tiwari vs. Union of India [(2024) SCC OnLine SC 15] is also relied upon to strengthen the above aspect. (xi) The urgency in placing LVB under moratorium and issuing the draft scheme on the same day i.e., November 17, 2020, was inter alia because during the period of moratorium the depositors were permitted to withdraw a maximum amount of Rs. 25,000/- (Rupees Twenty Five Thousand Only). Thus, a longer period of moratorium would have resu....
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.... net-worth certificate was prepared by the Statutory Central Auditor of LVB, appointed under the relevant laws. The same cannot be challenged on the basis of vague and unsubstantiated allegations in proceedings under Article 226 of the Constitution of India. Whether Deferred Tax Asset was required to be deducted for the calculation of net-worth has no relation with the challenge to the constitutionality of the impugned scheme. The calculation is challenged only for the purpose of obtaining compensation, which is self-serving. (xvi) The writing off the Tier II bonds is not under the impugned scheme. The same is as per the terms of the Information Memorandum, governed by Basel III Master Circular, which provides for writing off upon the trigger event i.e., the action under Section 45 of the Act of 1949. (xvii) The terms of the Information Memorandum and the Basel III Circular do not confer upon the bondholders the right to receive notice before writing off of Tier II bonds in case of a Section 45 action. The terms of Information Memorandum and Basel III Circular categorically state that upon PONV trigger, the bonds can be written off without the consent of the bondh....
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....t merely reiterates and informs the Basel III Tier II bondholders that RBI and the Central Government have the powers to write off their bonds in the event of amalgamation under Section 45 of the Act of 1949. (v) Subsequent to the amalgamation, DBIL conducted audits and internal investigations of various accounts in line with RBI guidelines on investigations in loan frauds. As a result, DBIL has come across various irregularities inter alia such as (a) sanction of loans by erstwhile LVB to entities for re-routing and investment into the rights issue of erstwhile LVB to the tune of more than Rs.100 crores; and (b) subscription by erstwhile LVB to non-marketable non-convertible debentures of entities, despite the management committee of Board of erstwhile LVB having not approved taking over the exposure of such entities and the said subscription being in contravention of the policy of erstwhile LVB resulting in NPAs. DBIL has identified several potential deviations which clearly indicate diversion of funds, round-tripping, and involvement of employees and members of senior management of erstwhile LVB to the detriment of financial affairs of the erstwhile LVB. Accordingly, DB....
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....t of 1949 empowers the RBI to regulate and supervise the banking sector. The banking companies are now operating in a more liberated environment. The banking companies in India now are enabled to raise capital with the best practices of international practices. The role of RBI, as a regulator of the banking sector, has increased and is required to be more vigilant. Catering to the changing times, economic scenario and to enable RBI to have more effective supervisory and regulatory role, amendments are carried out in the Act of 1949. 10.2. The scheme of Section 45 of the Act of 1949 is culled out thus: (i) Section 45 of the Act of 1949 empowers the RBI, where it appears that there is a good reason to do so, to apply to the Central Government for an order of moratorium in respect of a banking company. Under Sub-section (4) of Section 45 of the Act of 1949, during the period of moratorium, or any other time, if RBI is satisfied that (a) in the public interest; or (b) in the interest of the depositors; or (c) in order to secure the proper management of the banking company; or (d) in the interest of the banking system of the Country as a whole, it may prepare a scheme for re....
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....res was withdrawn by the depositors. 10.6. According to the petitioners, the LCR was at a healthy coverage ratio. The LCR, as mandated by the RBI, is 100%, whereas in the case of LVB, the LCR was at 294.81%. The same was above the threshold. Whereas, according to RBI, LVB had high Net Non-Performing Assets (NPA), the Capital to Risk (Weighted) Assets Ratio (CRAR) stood at - 2.85% and Common Equity Tier 1 Capital (CET1) stood at - 4.85% against the regulatory requirement of 9% and 5.5% respectively, negative Return on Assets (RoA) for two consequent years and as such, LVB was put under the PCA framework. 10.7. Further, the high withdrawals of the deposits by the depositors and the market conditions is the reason given by the RBI to take action under Section 45 of the Act of 1949. 10.8. The decision to amalgamate or reconstruct a bank is a policy decision. The said policy decision is to be undertaken (a) in public interest; (b) in the interest of the depositors; (c) in order to secure the proper management of the banking companies; or (d) in the interest of the banking system in the Country as a whole. The scheme of amalgamation floated by RBI in the present case refers to t....
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.... 3. Share Premium 2066.99 4. Revenue & Other Reserve 274.18 5. ESOP Outstanding 3.49 6. Special Reserve u/s 36(1)(viii) of IT Act, 1961 62.45 7. Balance in P & L account (2,969.87) 204.50 TOTAL CAPITAL 541.21 Less: Miscellaneous Expenditure to the extent not written off Deferred Tax (net) 1185.56 Fixed Assets (software) 54.82 1240.38 NETWORTH (699.17) OTHER DETAILS Capital Adequacy Ratio (%) As per Basel III -2.85% Net NPA as a percentage of Net Advances (%) 7.01% NET PROFIT FOR THE CURRENT PERIOD (509.28) NET PROFIT FORT THE PAST PERIODS (AS APPLICABLE) Net Profit (Year Ended March 31st, 2020) (836.04) Net Profit (Year Ended March 31st, 2019) (894.1) Net Profit (Year Ended March 31st, 2018) (584.87) 10.12. It can been seen that if 'Deferred Tax' is taken as a liability, then on....
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....y." 10.15. The court, in economic matters, would be slow to exercise its powers of judicial review. It would, in a normal course, not sit as an appellate authority over the decisions taken by the experts, more particularly in economic matters. RBI, being the regulator and the Central Bank of India, is bestowed with the power under the Act of 1949 to safeguard public interest, the interest of depositors and the owners, to secure proper management of the banking companies or in the interest of the banking system of the Country as a whole to prepare a scheme for amalgamation or reconstruction of the bank at the stage of its non-viability. Therefore, the decision taken by the RBI to amalgamate LVB may not be faulted with. On the Process: 11. As observed supra, this court would not sit in appeal over the decision taken by an Expert Body like RBI. However, this court would always be concerned in exercise of its powers under judicial Coreview to give due adherence to the decision making process. When the scheme for amalgamation is being prepared keeping in mind the interest of the depositors and the public interest, it would also be to safeguard the amount of the shareholders, vi....
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....ion. When we asked for the names, the same are not disclosed on the ground of confidentiality and a submission was made that the same would be given in sealed cover. The Apex Court, has time and again, deprecated the practice of giving information in sealed covers. We fail to understand as to how after the amalgamation has taken place, confidentiality is required to be maintained or that would affect the business interest of any banking company. 11.4. As observed above, during the court proceedings also, we asked RBI to be more transparent. We fail to understand the necessity to maintain confidentiality after the amalgamation has already taken place. Transparency would be necessary to eradicate any suspicion and to allay the contention of the petitioners about favouring DBIL and giving LVB to DBIL on a platter. After the court had asked them to disclose the names, there was no reason for them to withhold it. 11.5. In the case of Ganesh Bank (supra), RBI disclosed the names of the banks whose proposals were received and also gave reasons for selecting a Federal Bank for amalgamation with Ganesh Bank. At that time, RBI did not raise the issue of confidentiality. It is a commerc....
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.... such date as may be specified in the order, any Chairman, Director, Chief Executive Officer or other officer or employee of the banking company, as contemplated under Section 36AA of the Act of 1949. 11.10. Under Section 36AB of the Act of 1949, RBI has powers to appoint Additional Directors and these powers under Section 36AA and 36AB of the Act of 1949 are overriding powers of the RBI and not subject to the provisions of the Companies Act, 1956 or any other law. 11.11. RBI also has powers to supersede the Board of Directors as contemplated under Section 36ACA of the Act of 1949. Under Section 36AE of the Act of 1949, the Central Government can acquire the undertaking of a banking company in the interest of the depositors or in the interest of the banking policy or for the better provision of the credit generally and thereafter prepare a scheme. 11.12. Thus, while we find that when the decision to amalgamate LVB is not malafide and may be in order, the manner in which the draconian power was exercised by the RBI is not in order. Even if the decision has to be taken secretively in the interest of the Banking sector, the RBI has to maintain files. The decisions are to be r....
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....ction of interest or the rights, which the depositors and other creditors have in the banking company before its reconstruction or amalgamation. 12.1. According to the respondents, reduction would also mean reducing the value to zero. 12.2. Reduction of interest, which the members, depositors other creditors have in the banking company before its amalgamation, to such extent as the RBI considers necessary, will have to be construed purposively. RBI is required, pursuant to the scheme of amalgamation, to conclude the extent of the interest or rights of the creditors including the shareholders and the bondholders reduced. 12.3. The valuation of the transferor and the transferee banking companies will have to be made. First of all, the rights and interests of these shareholders and the bondholders, prior to the date of amalgamation, will have to be arrived at and upon amalgamation, if there is reduction of their interest, the extent of the reduction will have to be construed. 12.4. When the statute used an expression, the same will have to be given the purposive interpretation. To say that the interpretation of the term "reduction" would be confined to "zero", would not be....
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....networth has to be considered while considering the definition of 'networth' as enshrined under Section 2 (57) of the Companies Act, 2013, which reads thus: "(57) -net worth means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation" 12.7. RBI could have determined the swap ratio. It could have reduced the value of the shares upon evaluation of the respective shares of DBIL and LVB. A decision could have been taken either to give a particular ratio of shares and/or to compensate the shareholders and/or bondholders of LVB. The only reason given by RBI and DBIL is that the balance sheet disclosed the negative networth. On the basis of the deduction of the DTA, the Deferred Tax Liability of Rs. 1,185.56 crores, reflected in the balance sheet, has been taken into consideration to arrive at the negative networth of Rs. 699.1....
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....e tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. 12.12. The Accounting Standard 22 requires companies to make a provision for Deferred Tax accounting with reference to the difference between accounting income and taxable income. The Apex Court observed that the matching principle is an important component of accrual accounting. 12.13. We do not find that any such exercise, as is contemplated in the judgment of the Apex Court in the case of J.K. Industries (supra) about measuring the Deferred Tax Asset and Liability, has been carried out by the RBI before finalizing the scheme of amalgamation. 12.14. It is because the comparative valuation of the transferee bank and the transferor bank has to be made, Section C45(5)(f) of the Act of 1949 prescribes for the reduction of the interest or rights which the members, depositors and other creditors possess. Section 45(5)(h) of the Act of 1949 deals with the allotment to the members of the banking company for shares held by them therein before its reconstruction or amalgamation (whether their interest in such shares has been reduced under Clause (f) or not) of shares in the banking ....
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....ates that "in the event of any disagreement as regards the valuation of any asset and or the classification of any advance and or the determination of any liability, the matter shall be referred to the Reserve Bank, for its opinion, provided that until such an opinion is received, the valuation of the item or portion thereof by the transferee bank shall provisionally be adopted for the purposes of this scheme." 12.19. Covenant 5(3)(iii) of the scheme states that, "it shall be competent for the Reserve Bank, in the event of its becoming necessary to do so, to obtain such technical advice as it may consider to be appropriate in connection with the valuation of any such item of asset or determination of any such item of liability, and the cost of obtaining such advice shall be payable in full out of the assets of the transferor bank." Even after the scheme, RBI has the power regarding valuation of assets or classification or determination of any liabilities. 12.20. We are aware that the scheme of compulsory amalgamation is prepared by experts and the court, in ordinary course, shall not substitute its views with the views of the experts. The covenants of the scheme are certainly....
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.... concern on its own in the opinion of the Reserve Bank of India unless appropriate measures are taken to revive its operations and thus, enable it to continue as a going concern. The difficulties faced by a bank should be such that these are likely to result in financial losses and raising the Common Equity Tier 1 capital of the bank should be considered as the most appropriate way to present the bank from turning non viable. Such measures would include temporary and/or permanent write-off in combination with or without other measures as considered appropriate by the RBI. A bank facing financial difficulties and approaching a PONV shall be deemed to achieve viability if within a reasonable time in the opinion of RBI, it will be able to come out of the present difficulties if appropriate measures are taken to revive it. The measures including temporary/permanent write-off/public sector injection of funds are likely to: a. Restore confidence of the depositors/investors; b. Improve rating/creditworthiness of the bank and thereby improving its borrowing capacity and liquidity and reduce cost of funds; and c. Augment the resource base to fund balance ....
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....f the Master Circular - Basel III Capital Regulations states that if a bank is amalgamated with any other bank after the AT1 instruments have been written-down temporarily, the amalgamated entity can write-up these instruments as per its discretion. 13.5. Clause 2.14 of the Master Circular - Basel III Capital Regulations states that "if the bank is amalgamated with any other bank after the non-equity regulatory capital instruments have been written-down permanently, these cannot be written-up by the amalgamated entity". 13.6. Clause 2.15 of the Master Circular - Basel III Capital Regulations provides that when a scheme for reconstruction or amalgamation of a banking company is taken up under Section 45 of the Act of 1949, then such a bank will be deemed as non-viable or approaching non-viability and both the pre-specified trigger and the trigger at the Point of Non-Viability for conversion/write-down of AT1 instruments will be activated. Accordingly, the AT1 instruments will be fully converted/written down permanently before amalgamation/reconstitution in accordance with these rules. 13.7. Clause 2.20 of the Master Circular - Basel III Capital Regulations mandates the bank....